Why Apple Would Be Willing To Lose Money On A Smaller iPad

Sharp-minded Apple-blogger John Gruber has a long analysis on the 8-inch iPad. The most interesting bit comes at the end when he starts talking about the pricing.He suggests that when, or if, Apple releases a smaller iPad, it might be willing to make very little money on the tablet.

This would be a radical change since Apple is a company that makes a lot of money selling hardware at premium prices. However, to control the market, Apple might have to make some sacrifices.

Apple has Tim Cook, an expert at managing the supply chain. Its his expertise that allows Apple to make money on a $400 iPad. Even with Cook’s genius it’s hard to believe Apple will be have the same profit margin on an iPad mini as it does on a full sized iPad.

If that’s so, then why is the Mac market share, even after Apple’s recent revival, sputtering at a measly 5 per cent? Jobs has a theory about that, too. Once a company devises a great product, he says, it has a monopoly in that realm, and concentrates less on innovation than protecting its turf. “The Mac user interface was a 10-year monopoly,” says Jobs. “Who ended up running the company? Sales guys. At the critical juncture in the late ’80s, when they should have gone for market share, they went for profits. They made obscene profits for several years. And their products became mediocre. And then their monopoly ended with Windows 95. They behaved like a monopoly, and it came back to bite them, which always happens.”

On Wednesday, Cook echoed Jobs’ comments about iPhone pricing by saying “one thing we’ll make sure is that we don’t leave a price umbrella for people.” A price umbrella is a term used to describe the effect a dominant company can have on a particular market with a popular-yet-expensive product: competitors can enter the market with other products at lower prices and gain customers just based on affordability, buying those companies time and profits to use in order to make their product better.

What do these two quotes mean? They suggest Apple is willing to give up on big profits in order to take control of a market. Apple doesn’t want to give Google or Amazon any room to come in and steal tablet market share.

This is one of the advantages of having $100 billion in the bank. Apple can afford to earn less money in the short term to dominate the next generation of personal computing.

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